Vendor Management Scorecard Basics
Creating or purchasing a vendor management scorecard is an essential component of effective Supplier Relationship Management (SRM). A vendor management scorecard is a tool that is used to measure the performance and effectiveness of vendors and suppliers that provide goods or services to the business.
How the Process Works
The vendor relationship process typically begins with the creation of an RFP/RFQ or another document that vendors respond to in order for the business to objectively evaluate the vendors’ capabilities and resources. When the best vendor for the task is selected, a contract negotiation process begins which outlines all of the performance guidelines and expectations that a vendor will be legally bound to adhere to.
Once the terms of the contract have been agreed to by the buyer and seller, a binding agreement is executed that summarizes the mutual expectations, particularly as it relates to frequent monitoring and measurement of the vendors’ performance. Regular and frequent communication is necessary in order to ensure a successful vendor management process
Monitoring Performance of the Vendor
As outlined in The Vendor Management Best Practice Guide, one of the key performance criteria is a process to monitor the performance of the vendor. To do this, it is necessary to have a vendor management scorecard. Regardless of the size of the business, a vendor management scorecard should address the following criteria:
- The scorecard should measure the key performance indicators (KPI) that the vendor is bound to. An easy way to develop this list is to use the vendor’s contract terms as the list of measured items. In other words, build on the effort that was used to develop the terms of the contract to create a list of the most important items to measure with the scorecard.
- The scorecard should be easy to use by all employees that need to interact with this tool. It does not matter how comprehensive the list of performance indicators is if the tool is too cumbersome and user-unfriendly. Although the scorecard will be complete in its definition of what should be measured, if it is not intuitive, nobody will use it – which defeats the purpose of having a scorecard.
- The scorecard should have a corresponding timeline and set of milestones that are in sync with the performance indicators. That is, performance is a function of both times as well as quality. The two are not mutually exclusive, and the scorecard should be time, as well as quality performance-based.
- The scorecard should not be a surprise that a business suddenly decides to use with a vendor if they find that the vendor is under-performing. Ideally, the vendor has been made aware that their performance will be monitored and measured throughout the term of the contract. The measurement will be based on consistent and regularly scheduled audits or evaluations that are agreed to by both sides. This awareness should be created during the contract negotiation phase of the vendor relationship.
- The data that is collected and analyzed by the scorecard should be used to follow up with the vendor. What good is accurate data about the vendors’ performance if the business does not take action with the vendor based on the conclusions about vendor performance that the scorecard made visible?
Depending on the size of the business, perhaps a simple vendor management scorecard spreadsheet is sufficient for this purpose. For larger businesses, there are many commercially available vendor scorecards that are available.